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Jeanette Kozlowski

The Penny Auction: Is it a Gamble, Or Not?

8 January 2009

Adds comment from Swoopo United Kingdom

Some have called it eBay’s evil twin, while others have blasted penny auction sites like Swoopo as a total scam. In early September, as tech blogs and forums caught wind of this new take on the penny bid -- where bidders pay, per bid, to bid on high-ticket items at mysteriously low prices -- Swoopo’s traffic on both its American and United Kingdom site surged.

“In short, Swoopo is about as close to pure, distilled evil in a business plan as I've ever seen,” Jeff Atwood, a California-based software developer, wrote on his blog, “Coding Horror,” in early December. “It is almost brilliantly evil, in a sort of evil genius way.”

Yahoo! Answers even features the question: “Is the Web site Swoopo safe to use or a scam?” The user-selected best answer says: “I wouldn’t touch it, although it’s a genuine site.”

As many people call Swoopo and similar sites like Madbid and Yellmann a rip-off, there’s another camp that views the sites as plain and simple online gambling.

In late December, Mark D. Griffiths, a professor in the International Gaming Research Unit at Nottingham Trent University, told the British Broadcasting Channel that bidding in penny auctions “is akin to a gambling-like experience.” After doing additional research on the matter, he spoke with IGamingNews on Wednesday, reiterating his view.

“It’s quite obvious that these sites, the more socially responsible ones, they do know it’s akin to gambling because they’ve actually borrowed almost word for word (responsible gambling policies) and just took out the word ‘gambling’ and put in the word ‘bidding,' ” Mr. Griffiths explained.

On many sites, bidding starts at a low price (Swoopo’s Web site states all its bids begin at 8 pence with no reserve prices). When a bid is placed, the price of the item -- typically, an expensive electronic item like Nintendo’s Wii or a 42-inch flat-screen television -- goes up by 8 pence.

However, clearly stated on the site’s “How It Works” section are two catches: Each bid placed costs 40 pence, and if a bid is placed within the auction’s final moments, the auction will then be extended an additional 40 seconds. Swoopo clarifies that bidders who don’t place the winning bid are still charged. “Doing this allows us to offer the winners such great deals,” the site says.

Mr. Griffiths says these penny auction sites have many comparable qualities to gambling, which he has outlined in an article to be published in World Online Gambling Law Report later this month. In the article, he lists nine similarities and called claiming victory in a penny auction a chance-determined feat.

“I can’t see what they think is skillful about (it),” Mr. Griffiths said. “The only bit of skill is to just keep gambling -- sorry, to keep bidding -- one pence higher and hope that you are going to outbid the previous person.”

He said penny auction sites create an environment of near misses, which are common in gambling as well.

“You get two people battling it out for a particular item, and the last 60 bids of an item just may be two people,” he explained. “The more and more that you bid -- obviously spending £1 at a time while you’re doing it -- [the] more you are invested, and the less likely you are to drop out until you reach a point where you almost have bid as much as what the item would cost anyway.”

Additionally, much like online gambling sites, penny auction Web sites feature autoplay-like features, tips for winning, responsible gambling-like policies and multiple staking for no reward, Mr. Griffiths said.

“The fact that you’ve got people who can put in 30 or 40 bids and get absolutely nothing for it -- to me, that is gambling.”

Last June the Gambling Commission released a document that outlined a similar form of auction -- a reverse auction -- stating that the auctions could be considered as prize competitions, which are legal under the Gambling Act 2005. In a reverse auction, typically operated via text message or online, bidders pay for each bid, and the person with the lowest unique bid nabs the prize.

Yet in late December when the British Broadcasting Channel asked the Gambling Commission about penny auction sites, the commission said it could not comment on individual sites and “was not convinced” that these types of auctions could be closely compared to gambling.

“To be prize competitions, they need to ensure that they are not lotteries,” Anthony R. Coles, a senior partner with Jeffrey Green Russell, told IGamingNews. “The way to do this is for the promoters to make sure there is a machinery under which a degree of skill involved in placing the bid and fixing bids.”

Operators can show this by exercising transparency -- giving access to bidding histories and background knowledge of the product so that a degree of skill can be put into the bidding process, Mr. Coles said.

“If that doesn’t happen and players are simply bidding blind with no use of skill at all, then certainly the Gambling Commission takes the view that a penny auction like this can very well be an illegal lottery,” he added.

Mr. Griffiths said he finds it interesting that the Gambling Commission has accepted some forms of reverse auctions as gambling but has thus far written off penny auction Web sites.

“I don’t think the gambling commission has looked into this properly,” Mr. Griffiths said. “There is something like 2,000 people work at the Gambling Commission, and I certainly haven’t heard Brian Pomeroy, the C.E.O., say that it’s not gambling.”

Swoopo's United Kingdom office declined an interview request as did the chief executive of Yellmann. Calls and e-mails to Swoopo's American office were not returned.

The Penny Auction: Is it a Gamble, Or Not? is republished from
Jeanette Kozlowski
Jeanette Kozlowski